Definition of an Employee as Per the Income Tax Act

by Cheryl Withrow; Updated September 26, 2017
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The Internal Revenue tax code considers the degree of control a business exerts over an individual and the individual's independence when determining the worker's status as an employee or an independent contractor. The employer should consider the business relationship he has with the person in question for classifying an employee or independent contractor. The person performing services for a company may be considered a statutory employee, a statutory nonemployee, an independent contractor or a common-law employee.

Statutory Employee

Even though a worker has been determined as an independent contractor under common-law rule, the business may have to pay the employer portion of Social Security and Medicare taxes if the contractor falls within four categories and meets three other conditions as determined by the IRS. Categories include: a driver who distributes, meat, beverages (excluding milk), vegetables, fruits, or bakery products or who picks up or delivers laundry or dry cleaning if the driver is the company’s agent or he is paid on commission; a full-time life insurance salesman who primarily sells insurance for one company; a person who works at home on goods supplied by a company and returns the goods to the company or a person specified by the company if the company furnishes specifications for the work; and a full-time salesman who gathers orders from hotels, restaurants or similar establishments and the work performed is the salesman’s principal business. The three conditions include: the contract between the business and the independent contractor implies that most all services are performed for the company; the contractor does not have substantial investment in equipment, other than transportation facilities; and the services performed are for the same payer on a continuing basis. If the worker's duties match one of the four categories and all three of the conditions, the business must pay the employer portion of the worker's Medicare and Social Security obligation.

Statutory Non-Employee

Direct sellers and licensed real estate agents fall under the self-employed or independent contractor classification for federal income tax purposes if most or all income derives from sales and not the number of hours worked, and the seller or agent performs her duties under a contract indicating she not be treated as an employee.

Common-Law Employee

If a person performs services for a company and if that company or employer controls “what will be done and how it will be done” according to the IRS and common-law rule, that person is classified as an employee. Even if the employee has freedom of action, the difference lies in that fact that the company has the right to determine how the work is done.

Independent Contractor

Doctors, lawyers, accountants, contractors, veterinarians and others who work in a business or profession where their services are offered to the general public are normally classified as independent contractors. Under IRS definitions, an independent contractor is a person who works for a business that directs and controls the result of the work done, but not how it is done. Independent contractors who fit this description are considered self-employed and are subject to self-employment taxes under IRS rules.

Considerations

If a business owner experiences difficulty in making a determination as to a worker's standing, she may access IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to further guide her in the establishment of a worker’s classification. A business owner who classifies an employee as an independent contractor without reasonable grounds for doing so may find herself liable for taxes for the worker.

About the Author

Cheryl Withrow is a writer in Michigan’s untamed Upper Peninsula. Following a teaching career she served alternately as editor of the "Washington County News" and the "Geneva County Reaper," and as associate editor of "Bay Life" magazine. Withrow holds a Bachelor of Science in business with a major in accountancy from Wright State University and a Bachelor of Arts in English from Ohio University.

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